Why Real Estate Investors Are Switching To Short Term Rentals
It’s May 2022. We have seen unprecedented appreciation over the past 3 years, and historically low interest rates. Seasoned investors had a heyday adding properties to their portfolios, and we saw new investors (including myself) and venture capital groups enter the market because of the incredibly lucrative economic conditions. Last year, as prices were continuing to rise, the margins for cash flow and return on investment were beginning to shrink due to the rapid appreciation of home prices. Now with the 30 year fixed mortgage interest rate increasing from the mid 3% range to 5.5% over just a few short months, returns higher than breaking even for traditional 12 month lease rentals are increasingly rare.
This development has left experienced real estate investors wondering what their next move is and has aspiring investors dismayed and feeling they missed their chance to get in the market.
When a market shifts, investing strategy must shift as well. Below I have outlined 3 reasons why short term rental investments may be your answer to our economic moment.
1. HIGHER RETURNS
The bottom line is always the numbers, right? I do analysis every day for people who list their homes for a traditional 12 month lease and show them how much more they could make by switching to Airbnb or VRBO. To be fair, it does not make sense for every single home to transition, but every day I find 5-10 properties within a few hours of searching on Zillow that could increase their net operating income by 50%-200% by switching to short term. (See what your property could make by making the switch to short term with the analysis form)
For those looking to purchase a new property in the Denver metro, investors are hard pressed to find something over a 5% cap rate, or have a positive cash-on-cash return. Short term rentals can see double digit cash-on-cash returns and cap rates.
2. MORE OPTIONS & FLEXIBILITY
An incredible aspect of short term rentals is the flexibility it provides to the owner. You can own a vacation home in an area you love that makes a great return when you are not using it. You can have a place to host friends, family, or those in needs for periods of time. You can quickly do a renovation or add an amenity that increases your NOI for you next booking, rather than wait for a 12 month lease to come up.
3. LESS WEAR & TEAR
Yes, you read that right. Many investors fear the thought of having different groups of people coming in and out of their property. They have heard horror stories of parties and homes being caught on fire. To be fair, there is always risks, but that is the same for a long term rental as well. What separates STR’s from long term rentals is the following:
You have can set qualifications for people who are allowed to be in the home through the platforms.
You have much more control on what is permitted inside the home for short term guests than you do for longer term tenants.
The home is professionally cleaned after every stay.
A maintenance need is fixed as soon as requested.
I host an Airbnb (check it out here) that is a separate unit attached to my home. The honest truth is that side of the home stays in much better shape and is always cleaner than my side of the home, because it has to be to keep guest reviews high. When a tenant lives in a home, they clean when they feel like it, they may or may not disclose damage or problems. By and large short term guests use a home as a “basecamp” to rest and sleep as they explore a city or return from an event or activity that prompted their visit. Long term tenants bring the wear and tear of “living” in a home. A short term rental allows you to virtually know the condition of your property at all times, and the extra income allows you to keep it in top shape.
If short term rentals are an option you would like to explore, I am happy to be a resource in any way I can! Feel free to reach out to me at my contact info below, or schedule a time slot on my calendar.
